Howard Hughes Holdings Inc (HHH) 2018 Q3 法說會逐字稿

Good morning, and welcome to The Howard Hughes Corporation's Third Quarter 2018 Earnings Call.

With me today are David Weinreb, Chief Executive Officer; Grant Herlitz, President; David O'Reilly, Chief Financial Officer; and Peter Riley, General Counsel.

Before we begin, I would like to direct you to our website, www.howardhughes.com, where you can download both our third quarter earnings press release and our supplemental package.

The earnings release and supplemental package include reconciliations of non-GAAP financial measures that will be discussed today in relation to their most directly comparable GAAP financial measures.

Certain statements made today that are not in the present tense or that discuss the company's expectations are forward-looking statements within the meaning of the federal securities laws.

Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved.

Please see the forward-looking statement disclaimer in our third quarter earnings press release for factors that could cause material differences between forward-looking statements and actual results.

We are not under any duty to update forward-looking statements, unless required by law.

Please also note today's event is being recorded.

I will now turn the call over to our CEO, David Weinreb.

Please go ahead.

Good morning, and welcome to the Howard Hughes Corporation's Third Quarter 2018 Earnings Call.

With me today are David Weinreb, Chief Executive Officer; Grant Herlitz, President; David O'Reilly, Chief Financial Officer; and Peter Riley, General Counsel.

Before we begin, I would like to direct you to our website, www.howardhughes.com, where you can download both our third quarter earnings press release and our supplemental package.

The earnings release and supplemental package include reconciliations of non-GAAP financial measures that will be discussed today in relation to their most directly comparable GAAP financial measures.

Certain statements made today that are not in the present tense or that discuss the company's expectations are forward-looking statements within the meaning of the federal securities laws.

Although the company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that these expectations will be achieved.

Please see the forward-looking statement disclaimer in our third quarter earnings press release for factors that could cause material differences between forward-looking statements and actual results.

We are not under any duty to update forward-looking statements, unless required by law.

I will turn the call over to our CEO, David Weinreb.

Thank you, Dave, and thank you all for joining us today.

Welcome to our Third Quarter 2018 Earnings Call.

We had an outstanding quarter, where we continued to make good progress unlocking value throughout our portfolio and across all 3 of our business segments.

We saw continued improvement in our Master Planned Communities, operating assets and strategic development segments.

Before we dive into some of the details of the quarter, I thought it would be helpful to address the overall real estate market, specifically the residential home sale market as it relates to our MPC segment.

Further, we've received feedback from investors and analysts that our recent stock price performance has been highly correlated with the homebuilding sector.

I thought it would make sense to spend a few minutes highlighting why Howard Hughes has more advantageous economic characteristics than the homebuilding business.

We are geographically diversified but concentrated in the best supply-constrained markets.

And within those markets, we control the most desirable residential land and we only sell at the most attractive price.

We have built a portfolio of operating assets that, as of the third quarter, are generating an annualized NOI of $184 million, which we expect to continue to grow to over $300 million as the assets stabilize.

While we do have some exposure to homebuilders in that they are the end buyers of our residential land, we own the scarce asset that they need in order to manufacture their product.

We typically generate cash margins of approximately 75% to 99% when we sell our land and can afford to hold this long-term appreciating asset.

We can remain patient sellers of our desirable asset and wait for the most attractive price.

We do not manufacture homes to generate cash flow, and as such, do not have the same inventory risk in the event buyer interest wanes.

Over the long term, land values in our supply-constrained, increasingly dense communities increase in value, so there is little downside in waiting if there's a disruption in the market.

A temporary disruption in the price or pace of sale of our land is not expected to have a material impact on our net asset value if we remain disciplined in our approach.

Over the long term, property in our MPC should increase in value.

Time is the friend of our business.

Turning to the residential market conditions.

We have, as I'm sure many of you have as well, read multiple headlines about the potential slowdown in the residential home sales market.

Higher interest rates, coupled with increasing labor and material costs, have started to impact affordability across the nation.

As our MPC segment results demonstrate, as well as the underlying home sales data in our MPCs that Grant will detail later in the call, we have not seen any signs of a slowdown in our MPCs.

In fact, we have seen demand for our land from homebuilders remain strong throughout and subsequent to the third quarter.

Our residential land sales in the third quarter were actually the highest in the company's history.

We believe this is due to a number of factors, one of them being that as lower tax markets, both Las Vegas and Houston have fared better than some other cities around the country and are seeing in-migration from far more expensive parts of the country.

Further, we expect our MPCs to continue to prosper more than most other communities, given our deep amenity base, strong schools and access to major infrastructure.

With that said, we know that we are not immune to a change in market conditions.

This has been a long cycle and every real estate cycle will have volatility.

Our stated strategy at the company, and within our MPC segment, remains consistent as we are constantly planning and preparing for a change in market conditions.

Our goal since the company's inception has been to shift the company's cash flows from a dependency on land sales to a balanced funding model consisting of land sales, condominium sales and the growing reliance on stable, recurring NOI from our operating assets.

In the past 8 years, we have grown our operating asset NOI from $49 million in 2010 to our current run rate of $184 million and an NOI target of approximately $318 million upon stabilization, excluding the Seaport.

Further, we remain committed to only starting new developments within our strategic development segment that we are able to fund while maintaining a conservative overall balance sheet.

While a slowdown in the residential market could reduce our land sales and free cash flow, and therefore, slow the pace of new development starts, our diversified cash flow base from operating assets is expected to allow us to continue to execute on our business plan of converting raw commercial land into vibrant cash flow generating operating properties, albeit at a moderated pace.

Further, within our MPC segment, we are careful to only sell residential land to homebuilders to match the pace of underlying home sales.

If we put too much inventory into the hands of builders and the market turns, we risk oversupply and substantial pressure on the value of our remaining land.

If we don't sell enough land during strong periods, we risk a supply-constrained market that could lead to rapid home price increases and impact affordability.

We understand this delicate balance.

In addition, we are not subject to supply risk from third-party landowners.

Finally, homebuilders in our Summerlin and Bridgeland MPCs are building almost no speculative product, building homes only to meet current homebuyer orders.

By remaining disciplined throughout this cycle, we have helped to protect ourselves in the event of a downturn from a more volatile impact to the value of our land.

Again, to reiterate, while we are mindful of the possibility of a potential slowdown in the residential market, our MPCs remain strong with excellent land sales and strong underlying home sale data.

Further, we believe that our strategy allows us to both accelerate in good economic periods and remain in excellent financial footing in a declining residential market environment.

And the continued diversification of our cash flows gives us the ability to remain patient and preserve our long-term value if markets shift and we feel negative pressure on the value of our residential land.

From a financial perspective, MPC EBT increased $48.5 million from the third quarter of 2017 to $88.9 million in the current quarter, an increase of 119.7%, largely due to increased superpad sales in Summerlin and increased lot sales in Bridgeland.

With this quarter's results, we remain confident that this will be another year with very strong performance from this segment.

In our Operating Asset segment, total NOI increased $1.3 million or 3.6% to $38.7 million this quarter compared to $37.3 million during the same period last year.

Further, we experienced a $3.3 million loss at the Seaport this quarter as a result of preopening and start-up costs with opening new businesses such as our concert series, summer activations and restaurants.

And important to note that this loss is consistent with our expectations and included in our development budget.

Excluding the Seaport, our year-over-year growth in NOI would have been $4.6 million or approximately 12.4%.

This is largely the result of our portfolio continuing to stabilize.

In our Strategic Developments segment, we have increased our stabilized operating asset NOI target from $308.6 million at the end of the second quarter to approximately $317.6 million, not including the Seaport District, as of September 30.

This $9 million increase is a result of our acquisition of the Lakefront North office buildings in Hughes Landing and adding 2 floors or approximately 58,000 rentable square feet to 110 North Wacker.

We made the decision to add 2 additional floors to 110 North Wacker, given the strength we are seeing in this market and the demand being generated for this building in particular.

We are currently 39% leased and our leasing pipeline has enough activity to fill more than twice the remaining space.

Given this level of demand and the low marginal cost to add these additional floors, this represents an excellent risk-adjusted incremental return.

Additionally, we do not expect this will affect the building's completion date.

Moving to Ward Village in Honolulu.

We contracted to sell 220 condominiums during the quarter, including 216 homes in our newest building 'A'ali'i, which began public sales in January.

As of September 30, 'A'ali'i was 75% presold and 77% as of October 31.

We could not be more pleased with the enthusiasm that our customers are showing for this new innovative product type, even before construction began.

We broke ground on the building in mid-October.

We feel that the success and rapid absorption of this product type is evidence that people recognize our vision for Ward Village is coming together and there is no place comparable to live in Oahu.

We also believe that the rapid sales pace of this building indicates that we have the opportunity to increase the pace of development of the entire neighborhood.

As we mentioned last quarter, Ae'o is 100% sold out and we expect our first closings in the fourth quarter upon delivery of the building.

We are very excited for our new residents to move in and join the growing Ward Village family.

As of the end of September, we had sold 96% of the residences at Waiea, our first building to be delivered, and 99% of the residences at Anaha, our second building.

Merriman's Restaurant, which occupies 6,075 square feet or 38% of the retail space at Anaha, opened in June.

Ke Kilohana, our fourth building to break ground, consists of 375 workforce housing residences and 48 market-rate homes, for a total of 423 homes plus a manager's unit.

The project is 93% sold as of September 30.

We entered into 18 additional new contracts during October, bringing the building to 98% sold.

It is approximately 81% complete.

The retail is 100% leased to CVS/Longs Drugs.

With regard to the Seaport District, I am pleased to share that we signed a long-term lease with Nike for 23,000 square feet of creative office space on the pier.

We feel that this is a synergistic use with ESPN and exactly the type of tenant that we had been looking for.

There is significant demand for the balance of the office space and we are working to ensure that we continue to achieve the highest rents possible, while also filling the space with other synergistic tenants.

10 Corso Como opened up in September in time for New York Fashion Week.

The 29,000 square foot store has quickly become a leading destination in the New York fashion world.

Sarah Jessica Parker opened up her shoe store in September and there were lines down the street to get in.

We are also pleased to report that Roberto Cavalli, Cynthia Rowley, Big Gay Ice Cream, By Chloe and Cobble & Co.

have all recently opened in the district.

Construction on Jean-Georges' restaurant is now substantially complete and we expect to have a soft opening this winter with full opening in the spring of 2019.

The Rooftop restaurant, R17, is expected to be complete by the end of November and open later this year along with the winter rooftop experience.

They will be followed by Momofuku opening in the summer of 2019, followed by Malibu Farms in the third quarter, and last but not least, Andrew Carmellini opening in the second half of 2019.

Finally, we had a dynamic summer at the Seaport in which we welcomed more than 5 million visitors, despite the majority of the district being under construction.

As mentioned last call, we continue to stay the course and stay true to our vision, which we are confident best positions the Seaport District for long-term sustainable success.

With that, I will now turn the call over to Grant to discuss the details of our operational results.

Thank you, David.

I'd like to move on to the details driving the recent results in our MPCs, Operating Assets and Strategic Development segments, and then turn it over to David O'Reilly to discuss our earnings and financial activities for the quarter.

Before getting into the details of our MPC segment, I'd like to discuss what we are seeing in the residential new home sales market in our MPCs as this is what drives our landfills, given the recent news reports of a housing market slowdown.

As David said, we have continued to see strong demand for our residential land and believe this is due to the location of our communities in Texas and Nevada, our MPC's dominance of their individual markets and the fact that we and the homebuilders that buy from us can offer the right priced products for the market.

While we have seen reports of a slowdown in the growth rate of new home sales, we have not seen any evidence of it in our MPCs to date, although we are constantly monitoring sales pace in our communities.

Excluding the Woodland Hills, which had not started selling lots in the third quarter of 2017, new home sales in our MPCs during the third quarter increased 8.1% compared to the same period in 2017.

Again, excluding the Woodland Hills, where 22 homes were sold this quarter, 482 homes sold in the third quarter of 2018 versus 446 in the same period of 2017.

Now let's talk about the details driving our MPC segment results.

Total revenues increased to $143.1 million this quarter from $64.9 million, an increase of $78.2 million compared to the third quarter of 2017.

Two large land sales in Summerlin drove the majority of the increase.

We recorded 123-acre, $69 million landfill that closed on July 10 and a 38-acre sale that closed on September 19 for $22.1 million.

This was Summerlin's strongest quarter for land sales in its history.

At Summerlin, we continue to experience great demand for residential land, as evidenced by these recent sales.

Residential land sales for the quarter totaled 160.8 acres compared to 57.7 acres for the third quarter of 2017, a 179% increase.

The price per acre increased from $546,000 to $572,000 per acre quarter-over-quarter, a 4.8% increase.

Summerlin had 302 new home sales during the quarter.

This compares with 266 during the same quarter of 2017.

This equates to a 14% increase.

Through the first 3 quarters of this year, Summerlin had sold 1,046 homes compared to 717 last year.

This is a 46% increase and greater than the entire number sold in all of 2017, which was 1,022.

In addition, the median new home price increased 6% to $581,995 from $548,000.

Demand is extremely strong in this land-constrained market.

The new home market in Las Vegas is not a speculative market, so nearly all new homes under construction are contracted for sale.

The resale market continues to be severely constrained with only a 2-month supply of homes on the market, far short of a balanced 6-month supply.

Builders need lots in this supply-constrained market and we have the largest, most desirable land in the valley.

According to the Housing Research Center's most recent report, despite the fact that it led the nation in home price increases, going up 13.9% year-over-year, Las Vegas is still 19.8% below the previous peak in prices, while the Composite 20-City Index is 3.5% above the peak.

Also according to RBC Capital Market's October 18 report, Las Vegas' affordability, which is calculated by dividing payment by income, is at 25.4% for the third quarter, below its peak of 37.7%.

The Summit, our joint venture with Discovery Land in Summerlin, includes 260 units made up of 146 custom lots and 114 planned dwelling units.

Since the joint venture started closing lots in the second quarter of 2016, we have closed land sales totaling $328.2 million.

For the quarter, we recognized $9.5 million in equity and earnings compared to $6.5 million in the third quarter of 2017.

In Bridgeland, we continue to see robust demand for new home sales, which has translated into continued demand for our land from homebuilders.

In the third quarter of 2018, there were 117 new home sales compared to 92 in the third quarter last year, a 27% increase.

Year-to-date, there have been 379 new home sales compared to 316 in the same period of 2017, a 20% increase.

For the 3-month period ending September 30, 2018, Bridgeland sold 42.4 residential acres compared to 17.5 acres for the same time period in 2017, representing a 142% increase and Bridgeland's strongest quarter of land sales in its history.

We averaged $378,000 per acre during the third quarter compared to $369,000 per acre during the third quarter of 2017, a 2.4% increase.

The increase was primarily due to the mix of lots sold during these periods.

During the third quarter, the median new home price in Bridgeland stayed essentially flat at approximately $370,000.

According to our surveys, there are 78 homes on the market as of September 30, 2018, which is approximately a 1.6-month supply based on current absorption rates.

Continuing in Houston.

The Woodlands new home sales fell from 88 in the third quarter of 2017 to 63 new homes in the current quarter.

Year-to-date, there were 265 sales compared to 262 sales for the same period in 2017.

The median new home price decreased from $450,000 to $438,000 for the quarter compared to last year.

Once again, this is a result of sales mix and reflects the sale of higher-priced homes during the third quarter of 2017 and more of the moderately priced homes in the same period in 2018.

According to our in-house research, as of September 30, we estimate that there were 100 spec homes available from all builders in the Woodlands, which is approximately a 3.1-month supply based on current estimated 2018 absorption levels.

This reflects a strong demand in the community.

For the 3-month period ending September 30, the Woodlands sold 13.3 residential acres compared to 11.1 during the same period last year.

The average price per residential acre decreased to $542,000 for the quarter compared to $675,000 in 2017.

This represented a 20% decrease.

The decrease is attributable to the mix of lots sold.

Turning to our Operating Asset segment.

NOI increased $1.5 million or 4.1% from $36.3 million in the third quarter of 2017 to $37.8 million this quarter.

This is largely the result of increases of approximately $2.5 million from office and $800,000 from multifamily as the portfolio continues to stabilize.

These increases were offset by decreases in our retail portfolio of approximately $1 million.

Excluding the Seaport, our retail portfolio was up approximately $2.2 million, led by Downtown Summerlin and Ward Village.

As David said, it is important to note that the $3.3 million loss at the Seaport this quarter is the result of start-up costs of opening new businesses and is consistent with our expectations and included in our development budget.

Our office portfolio NOI increase was led by increases in Three Hughes Landing, 10 through 70 Columbia Corporate Center and ONE Summerlin.

Also in our office portfolio, we acquired 2 vacant Class A office buildings totaling 257,025 square feet, immediately adjacent to our Hughes Landing development in the Woodlands, along with 12.9 acres of developable land for $53 million.

This adds to our office portfolio and provides immediate leasable inventory at below replacement cost.

This purchase was available to us due to a right of first offer that we had on the land and is an example of HHC's control of the inventory in these markets and our ability to make opportunistic acquisitions at highly attractive returns.

We expect this acquisition to yield an 8% return on cost when stabilized.

Our hospitality portfolio NOI increased by approximately $321,000, led by improvements at The Woodlands Resort and Conference Center and the Westin.

These increases were offset by Mr. C's Hotel at the Seaport, which recently opened.

Sequentially, hospitality NOI decreased by approximately $3 million from the second quarter of 2018 to the third quarter.

This was led by The Woodlands Resort and the Westin, which were affected by typical seasonality.

Our multifamily portfolio NOI improved by approximately $869,000 this quarter, led by m.flats/TEN.

M in Columbia and the Constellation in Summerlin, which was not wholly owned by the company in 2017.

We are very pleased with this progress made in our operating asset portfolio.

With that, I will turn the call over to David O'Reilly for our financial results and outlook.

Thank you, Grant.

I'd like to start with a quick overview of our earnings, including a discussion of a change in accounting methods that had a material impact on our quarterly and year-to-date earnings, before summarizing our recent financing activity and then turn to our current leverage and liquidity metrics.

I hope that you've been able to review our 10-Q earnings release and supplemental package filed yesterday, which contains details of our financial and operational results.

I'd like to begin with the change in accounting methods.

As we previously mentioned, beginning in January of this year, following FASB's new guidance for public companies, we have changed from recognizing condominium sales revenue on a percentage of completion basis for units under contract, to recognizing revenue only when a unit sale closes.

Accordingly, we are required to recognize revenue and cost of sales for condominiums only after the sales to the buyers have closed.

This change relates solely to the timing of recognizing revenue on these sales.

It means that revenue will generally be recognized later than it previously had been and that the revenue is expected to be more volatile as it's only recognized as unit sales close, which tend to be in large numbers just after a building is delivered to the buyers.

This change in accounting methods has a negative impact on earnings in our Strategic Development segment, despite extremely strong condominium sales this year.

Under the new revenue recognition accounting rules, we recognized $8 million of revenue in the third quarter.

Under the former accounting rules, we would have recognized an additional $43.8 million of revenue in our strategic development segment for this period.

As you can see, as a result of the change in accounting rules, the results are not comparable to last year.

We completed the third quarter with GAAP income of $23.4 million or $0.54 per diluted share.

This compares to $10.5 million GAAP income or $0.24 per diluted share for the third quarter of 2017, a $12.9 million increase.

The increases were primarily driven by higher land sales in our MPC segment, partially offset by the change in condominium revenue recognition rules.

NAREIT-defined FFO was $53.9 million or $1.24 per diluted share for the quarter as compared to $45.3 million or $1.05 for the third quarter of 2017.

Core FFO was $72.5 million or $1.67 per diluted share, an increase of $12.4 million compared to $60.1 million or $1.39 per diluted share in the third quarter 2017.

The increase in FFO and core FFO were largely due to increased land sales in our MPC segment, partially offset by the change in accounting rules.

Turning to our financings.

On July 20, we closed on a $51.2 million construction note for the Las Vegas ballpark.

The loan bears interest at 4.92% and matures on December 15, 2039.

The note is secured by the ballpark and by the proceeds of the naming rights and marketing agreement with the Las Vegas Convention and Visitors Authority, which provides for $4 million in annual payments to the company in each of the next 20 years.

On July 27, we closed on a $34.2 million construction loan on Bridgeland Apartments.

The interest-only loan bears interest at LIBOR plus 2.25% and has an initial maturity date of July 27, 2022, and one 1-year extension option.

The loan has a 25% repayment guarantee that burns off after the property has achieved a 1.25x debt coverage ratio.

On September 11, we closed on an $89.8 million construction loan for 6100 Merriweather, formerly known as Three Merriweather, and an $85.7 million construction loan for the Columbia Multi-family project.

The loan bears interest at 1-month LIBOR plus 2.75%, with an initial maturity date of September 11, 2022, and 2 1-year extension options.

The loans are cross-collateralized.

On September 18, 2018, we closed on a secured nonrecourse corporate credit facility, with loan proceeds of up to $700 million, comprised of a $615 million term loan and an $85 million revolver.

In addition, we have the ability to increase the revolver by $50 million through the facility's accordion feature.

The 5-year financing carries an interest rate of LIBOR plus 1.65% and refinances approximately $609 million of existing debt that carried a weighted average interest rate of LIBOR plus 2.2% and a weighted average remaining term of 1.7 years.

The initial collateral for this loan will include portions of Ward Village, 10 through 70 Corporate Center, One Mall North, One Merriweather, 1725-35 Hughes Landing, the Westin, Embassy Suites, Creekside Village, Lakeland Village and 1701 Lake Robbins.

This new financing lowers our cost of capital while extending term, enhancing liquidity and improving operational and financial flexibility.

The initial amount drawn on the loan was $615 million.

The revolver remains undrawn.

We hedged our interest rate risk on the full $615 million term loan with a swap, resulting in an effective rate of 4.61% for the 5-year term.

Lastly, on September 25, we closed on an amendment to the construction loan for 110 North Wacker that increased the loan from $494.5 million to $512.6 million and increased our guarantee to $92.3 million.

This was done in conjunction with our increasing the building size by 2 floors as previously noted.

As of the end of the third quarter, our total consolidated debt to total assets was approximately 45.2% and our net debt to enterprise value closed the quarter at 31.2%.

From a liquidity perspective, we finished the third quarter with approximately $454 million of cash on hand.

As of September 30, we had 25 projects in our Strategic Development segment with anticipated total cost of $4.2 billion.

Of that amount, we have previously funded $2.5 billion, leaving $1.7 billion in estimated remaining cost.

We expect to meet this obligation with a combination of existing construction loans, which at quarter end had approximately $1.1 billion of committed but undrawn capacity and with an anticipated loan of $74 million for Two Lakes Edge.

This leaves a net remaining equity requirement of $512 million, which we expect to fund through a combination of our free cash flow from our operating assets and MPC segments, net proceeds from condominium sales and noncore asset sales, and lastly, our existing cash balance.

Again, as of the end of the third quarter, with net equity requirements of $512 million, significant free cash flow and cash of $454 million, we have full confidence in our ability to meet all of our current funding commitments given the strength of our contractual operating cash flow and our visibility into the land sales for the remainder of the year, along with the expected closings of the 100% sold Ae'o condominium building.

With that, I'd like to turn the call back over to David for closing remarks.

Thank you, David, and thank you to everyone for joining the call.

We are very appreciative of you, our investors, for your support and for choosing to invest your capital alongside ours in this special company.

I want you to know that even though our focus is on growing the long-term intrinsic value of our business, the recent decline of our share price is not lost on this management team.

David, Grant and I have collectively invested a significant amount of our personal capital in HHC.

The 3 of us collectively own approximately 1.5 million shares and approximately 2.1 million warrants in the company, representing a meaningful portion of our net worth and aligning us with our shareholders.

When the company shares trade like they have been over the past quarter, we share your pain.

I want you to know that when I see these short-term fluctuations in our share price, I am disappointed but I am not losing sleep over them.

Of course, our current share price bothers me, but I say this because I know the strength of the business, the team and the platform we have built at HHC.

In summary, I believe that our share price is not reflective of the underlying value of our business and I'm confident that over the long term, our true value will become apparent to the market.

And despite the short-term pressures we face as a result of the decline in share price, we remain steadfast in our business plan.

We are driven by increasing our net asset value on a per share basis.

That will continue to be the ultimate driver of our decisions.

Again, thank you all for joining today.

I would now like to open the call up to questions.

(Operator Instructions) Today's first question comes from Daniel Santos of Sandler O'Neill.

So my first one is on the 10b5 program.

The stock's down about 10% since it was announced.

What are your thoughts on maybe doing an overnight deal once the program expires?

And do you anticipate any board changes once the shares are sold?

Dan, with regard to Pershing Squares' decision to sell shares, I really -- we're not in a position to talk about that.

And whether they're likely to continue to sell through a 10b5 overnight, or otherwise, is completely up to them.

What I can tell you is what Bill and the team of Pershing have told us, is that they remain very committed to the HHC business.

The rationale for selling they've talked about as it relates to some concentration issues.

And in terms of changes to the board, that's a question for our Governance and Nominating Committee of the Board and not something that this management team is going to answer.

Got it.

Okay.

And then just 2 quick ones from me.

So could you walk us through the timing of the restaurant openings at the Seaport?

And they seem to be taking a little bit longer than expected.

I can reiterate what David said earlier on the call and that we'll have a soft opening this winter for Jean-Georges with a full opening in the spring.

Momofuku will open immediately thereafter.

R17, which is the Rooftop restaurant, is opening this winter.

Later in the second quarter, in 2019, will be Malibu Farm's, and Andrew Carmellini will be in the second half of '19.

I think that, yes, we would've liked to have seen them open sooner, but I think strategically, opening these in the spring and in the summer as we start next summer's concert series will benefit everybody.

And like we've always said, and like David said at the end of the call, we're driven by driving long-term shareholder value, and we're going to make the best long-term decisions for this business that are going to increase value for all of our shareholders and not feel the pressure to make short-term decisions that could negatively impact us in the long term.

And I think that's the mindset that we're taking as we pursue these openings and get things done and ready to go.

Okay, that's helpful.

And just lastly, could you give us a little bit more color on the 2 buildings you bought down in Texas and whether or not we should expect to see more acquisitions like that?

Dan, it's David Weinreb, and thank you for your questions.

And your question actually is quite timely.

Lakefront North, our recent September 5 acquisition of 257,000 square feet, which you may recall were 2 vacant buildings, largely vacant and some excess land, this morning, we actually signed an 87,000 square foot lease above our pro forma, which brings those buildings to approximately 60% leased.

And I think strategically, Dan, just to put a period at the end of that, if we can increase our market share and dominant ownership of assets within our Master Planned Communities, we're going to continue to look to do that.

As we said in the press release when this was announced, we're at a point where we're seeing office leasing momentum come back and that's obvious with the lease we signed this morning.

And when faced with a decision of whether or not we should build for-use lending at over $325 a foot or acquire these 2 buildings at $200 a foot and you get the land for free or ascribe some value to the land and we pay less than that per foot and be able to hit the similar rents and lease it immediately and not wait for the construction to finish, it absolutely made sense for us economically and from a risk-adjusted return perspective and we candidly think it was a great capital allocation decision.

And our next question today comes from Craig Bibb with CJS Securities.

So good news, bad news in Ward Village.

You -- at this current pace of sales, you guys will be out of inventory entirely by late January.

What's the game plan to create more inventory faster?

Craig, it's Grant.

The good news is that we have plenty of inventory to put on the market.

We're in designs on a number of towers.

We've got approval on Ka'ula earlier in the year, which is the next tower, and we hope to launch sales either at the end of the year or January.

So we'll have plenty of inventory to put back to the market.

And we're excited about the next tower, which will be adjacent to 'A'ali'i and be on the Central Park, which is the gateway to -- or the center of the project and opens on to the ocean.

So look out for designs on that building with great architects and interiors for people to buy, both locals and the Japanese market.

Okay.

And what's the expected finish date for that building?

The finish date will depend on, obviously, presales.

As you know, we like to get to 50% presale before we begin construction.

As soon as we get there, we'll give you a finish date on the building.

Okay.

And David, maybe with the change in accounting for condo sales, what do you expect to book in Q1 on the opening of Ae'o?

Well, right now, we're expecting to close some of the units at Ae'o in December and some in January.

So between those -- that's kind of 60- to 90-day window of December, January, February.

We should expect to book all of the revenue and expense of that tower for 100% sold-out tower.

Right now, I can't give you much guidance beyond in terms of what percentage is going to fall in the 4Q and 1Q.

I would expect about 1/3 to 40% in December and the remainder in the beginning of the year.

But that is subject to our third-party buyers coming through with their closing statements of funding, mortgage, all those good things that are outside of our...

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Okay.

Am I still on?

Yes, sir.

You are still live.

Sorry about that.

No, that's okay.

It was interesting.

All right, then just sticking with -- well, switching -- sticking with Strategic Developments.

So 110 North Wacker, you added 2 floors.

Obviously, demand is good.

Are you guys likely to make announcements before the end of the year?

We're in the process of lease negotiations with a number of tenants.

And as we said, we have demand for 2x the tower.

Clearly, as those leases get signed, we'll let you know.

So it's a process -- it's a long process of lease negotiations.

So hopefully, we can make a couple of announcements by the end of the year, but I wouldn't focus on that too much.

We want to deliver the building by 2020, and by then, we hope to be substantially leased.

Okay.

And then just kind of same question with Floor 4 on Pier 17.

I think the same thing, Craig.

We're not going to report on leases until the ink is signed, but we've got a lot of strong activity with synergistic users.

And we're very pleased with where we are and expect in the coming quarters to be announcing very positive news.

Okay.

But David, at the Seaport preview, you kind of suggested maybe before year-end you guys be wrapped up on the Pier.

So has that changed or...

Well, let me try and [answer that, Craig.] If we can announce the leases tomorrow, we'll do it.

We're working as hard as we can to get them done.

And if we tell you we'll have them leased in a week, if we lease them in 2 weeks, you're going to wonder why we didn't have them leased in a week.

So what we can tell you is that we're working closely with tenants.

And as soon as they are signed, we will let you know.

Again, we won't sacrifice the long-term economics to make sure we get them done inside a week, inside a month, inside a quarter.

We're going to make sure we get the best deal possible for our shareholders.

Okay.

Last one, if I'm allowed.

Bridgeland really seems to be just gaining some momentum.

I think it's -- if you straight line their acreage sold to get to your expected sell-out date, it's like 150 acres would be their straight line.

When do you guys think you could hit that?

I think you're like 99 acres trailing now?

It's such a lumpy business.

As you know, we're very pleased with the progress at Bridgeland.

Our goal is to get to 1,000 lots sold as soon as possible on average per year.

That's really a function of the market, but we're pleased with the progress we've made, especially in 2018, and hope to continue that in 2019.

We're seeing extraordinary demand in Bridgeland, even though the housing news piece says otherwise.

We got record [sales] almost every month this year in Bridgeland relative to its past history and, obviously, there's a (inaudible) quality to the extent the markets are assessed, but we see Bridgeland as the future MPC of Northwest Houston.

And your next question comes from Scott Schrier with Citi.

This is Ken on for Scott.

Can you share a little bit more about maybe sales pace for the MPCs maybe by quarter -- sorry, maybe by month for each -- for this quarter?

Well, I don't think it's really a relevant question because the builders generally, especially in Houston, will want to close at the end of each quarter.

They don't really take down lots on a straight-line basis over the quarter.

Most of them like to close pre the end of the quarter.

So we're not looking at pace on a monthly basis.

Rather, it's actually on an annual basis and on a multi-annual basis.

Look, in terms of home sales, I mean, Ken, as we talked about last quarter, Bridgeland and Summerlin were up 40% year-over-year Q2.

Q3, as Grant said in his remarks, Bridgeland was up 27%.

Summerlin was up 14%.

It's still very strong.

I wouldn't read too much into that data, other than to say we're very pleased with the underlying home sale data.

Homebuilders continue to look for more land for us.

We're preparing it and getting ready to sell that to meet underlying home sales so that we keep that balanced approach of making sure we have the right amount of inventory in our homebuilding partner's hands.

And we'll, at the end of the day, look to the supply of resale homes and new homes in the market and at a balanced market you're at 6 months and we're way under that.

So we think there's plenty of room to grow.

Great.

And in terms of start-up costs for Seaport, can you quantify or help us frame out expected cost for the coming quarters and maybe share if that's more towards events and activations or maybe more towards the restaurants, retail or office space?

It's really towards a balance of the operating businesses, the restaurants, the activations, the concerts and events.

We saw some of it this summer as we opened a number of folks like 10 Corso Como, Cobble & Co., the Garden Bar, the Heineken Riverdeck, et cetera.

I think we'll continue to see some of those and we budgeted to continue to see some of those as we open up the incremental restaurants and the Rooftop restaurant Jean-Georges, David Chang, et cetera.

Again, those are all start-up costs associated with opening operating businesses that are in our development pro forma.

They're part of the overall total cost so I don't want to count them twice.

They will continue to hit our NOI, but that will also start to be offset by the positive NOI of those businesses operating and generating free cash flow when they move from start-up towards stabilization.

And we start to see new great tenants like Nike come in and pay great rents.

So we'll continue to see that.

And we'll highlight it each quarter.

They're largely dependent on the timing as each opening occurs.

And again, we'll highlight it each quarter as it comes, but I can't really tell you what amount will be in each quarter for the next several quarters as, a, we don't provide guidance, and b, the timing, as you know, can shift around a week or 2 here or there and that can move it from 1 quarter to the next.

Got it.

And last question for me, regarding 250 Water Street.

In terms of the planning and expectations for the usage there, is that dependent on retail and office space demand or something else?

So our goal of it -- one of the goals with the acquisition of 250 Water was to combine that with our air rights at Seaport District and move those air rights over to 250.

We're working closely with the city to do that.

And while we don't have anything to announce today, that's our goal.

And our next question today comes from Tayo Okusanya of Jefferies.

My first question is the superpad sales that were announced this quarter.

Could you just give us a little bit more detail behind those sales?

Was any part of it like sales to -- for hospitals or things of that nature?

I'm just trying to understand whether it was really more residential home stuff that was pushing it this quarter or whether it was just, again, other type of land sales?

Yes.

Thanks, Tayo.

That's actually a really good question.

That superpad was comprised of really 2 pads.

And the reason for it being sold at one time was that the homebuilder who bought it wanted to make sure they controlled the balance of the village.

And we went to them at the end of last year and said to them if they wanted to control the entire village, they needed to take down both parcels of land.

And as your question is to whether it's commercial or not, it's entirely residential sold to a national homebuilder.

And remember, I will say this, we will not sell commercial land unless it's for a non-competitive use to our existing portfolio.

So unless it's to, as you said, a hospital or another stated use similar to that, it's likely we will not be selling commercial land.

Okay, that's helpful.

And then, on the other hand, I appreciate a lot of the comments you made earlier on about the volatility in the stock price, the management's stake in the company.

I'm just curious, when you have instances like this, does it ever make you consider putting in a stock repurchase type plan, just to show increased confidence in the company?

So that at certain points, at certain valuation, is probably the best use of your capital to buy back shares.

Yes, absolutely.

And Tayo, you've hit the nail on the head in that, that is, at the end of the day, capital allocation decision.

And there are times where we could be allocating capital to buying back shares as that generates the best risk-adjusted return.

We did that earlier this year at a price that is candidly higher than where we are today.

This most recent drop in share price happened subsequent to the end of the quarter, when we were in blackout and we weren't able to buy back shares, but that's something that the board, I'm sure, will address and continues to think about every meeting that we have.

And when that happens, we'll -- if we do put in a buyback plan, we'll announce it.

I mean, historically, we've been focused on buying back meaningful amounts of shares and blocks at nonnatural holders of our securities when we can achieve a nice discount on that acquisition as it's really a meaningful capital allocation decision.

And unfortunately, with a buyback, you are limited by only doing a certain percentage of average daily volume.

You don't want to be too many days in the market in a row and it's difficult to get a meaningful amount of your capital allocated.

But as we've carried down to this level, that's something that has returned to front of mind and something that they will continue to evaluate.

And our next question today comes from Vahid Khorsand of BWS Financial.

First question.

When I'm looking at the MPCs, The Woodlands is now down to 184 residential acres.

I wonder if you could help us out in figuring out what we should expect in terms of pace of sales and if you would hold onto any of those acres for multifamily developments that you're going to do yourself.

Well, I'll answer the second part of your question first.

It's David O'Reilly.

The multifamily product that we're developing in The Woodlands and continuing to develop in The Woodlands is on our commercial acreage there.

So we have plenty of supply of commercial acreage, plenty of entitlements to do.

And with our latest at Hughes Landing, the second phase of multifamily there, we're really excited about the returns we're able to generate.

Our plans for selling those remaining acres in The Woodlands are no different than selling the acres in any of our other Master Planned Communities.

We're going to wait until we get the price that we like that's appropriate for that land.

And if we do, and we're keeping up with underlying home sales and matching the supply-demand dynamics of land in the market, we'll sell that land.

Just to add to that.

That land fuels our development business.

And to the extent we require capital to continue development, that's really the only time that land -- that commercial land needs to be or essential land needs be sold.

It's an appreciating asset over the long term, and therefore, selling it at a discount makes no sense to generate cash if that cash doesn't have an intended purpose.

So to the point, we have plenty of development on our books right now, over a couple billion dollars.

And we're no short supply of opportunities to continue development and allocate our capital.

And that's obviously a great thing for us.

Okay.

And then my follow-up to that is, I know on a per acre basis, it comes down to the mix of what you sell it for or who you sell it for and the development rights they have to it.

So with 184 acres left and keeping in mind those strategic developments, is this something you hold on for more denser development?

It depends on where it's at.

Of course, as you know, last year, we increased the density with some of our superpads in Summerlin in order to make houses more affordable and that strategy actually worked for us and we sold a number of those parcels in order to do that.

But the answer to the Master Planned Community is not only to get the highest-priced homes but it's to get a balanced mix of homes so that you create a virtuous cycle of an economy that allows everybody to participate in that economy and meet the needs of that economy, whether it's a first-time homeowner or a multimillion-dollar homebuyer.

So at the end of the day, we want to create a broad mix of homebuyers in the market which allows for demand for those commercial amenities to then come buy, which is where we'd generate our stabilized NOI, which ultimately creates the most value for us as a company.

Okay.

And then skipping over to Seaport.

On the Nike lease, when are they expected to move in?

And when would you -- are you already collecting any payments from them?

So we're not collecting payments from them until they obviously move in.

But I don't know the exact dates and we can get back to you on that, but they've got to obviously build out their space and then commence their lease but it's in pretty short order.

Okay.

And then, David, on the property-level debt, it looks like everything is pretty much secured until around 2021 mostly.

At what point do you go back with your refinances?

Is that something you're still looking to do?

Or is that something you'll wait a year to figure out?

We never stop evaluating opportunities to refinance our debt to lower our cost of capital, extend our maturity, increase our financial flexibility.

I think that the prohibitive prepayment cost of our existing bonds makes it difficult right now, but every other piece of debt is on the table and we're always looking at it.

And that's something you saw us do this quarter with this new term loan and line of credit.

We reduced our cost of capital.

We took 1.7 years of weighted average maturity [out supply] and increased our financial flexibility as a result with an incremental $85 million revolver.

And our next question today comes from Mike Mitchell of Locust Wood.

It's actually Steve Errico for Mike.

I get what you're doing with this synergistic -- synergy with ESPN.

I was just curious.

Now that, that has occurred, David, do you think that that's an accelerant to the remaining leases?

Like, have you kind of built a core and you can fill in around it?

I think as we mentioned earlier, we have very, very strong activity with several users that we've been in discussions with for several months.

And we're hopeful that the leases that we're working towards will execute in the coming weeks, perhaps it will be a month or 2. They're complex, but they're very dynamic and we're excited about them.

And Steve, just to add to that.

The key reason to sign semi-domestic tenants is that they further attract other tenants.

So clearly, our goal is that both Nike and ESPN will continue to create demand for further office tenants who want to join them.

It's a nice core you built down there, so I was just thinking it should accelerate.

So congratulations on Nike, it's a great tenant.

And our next question comes from Alex Barrón of Housing Research Center.

My first question, and I apologize if somebody else already asked it, maybe I missed it, but the other operating -- other property operating cost of $42.9 million this quarter, it seemed like a pretty big jump compared to any previous quarter.

Was there any onetime item in there?

So the other property operating cost include a lot of those start-up costs that we talked about earlier with the Seaport and the retail segment.

And again, those hit the operating statement but they're also part of our development budget and it's all things that were budgeted and known ahead of times.

And look, if you exclude those numbers and you go back to the core operating performance of our operating asset portfolio and you just look at the year-over-year results, our office portfolio is up 18%.

Our multifamily is up over 20%.

Hospitality is up 8%.

And if you exclude the Seaport, the remainder of our retail portfolio is up 17%.

So it's a great year-over-year growth across the portfolio, highlighting how great our operating teams have done on running these assets and leasing them up towards stabilization.

Yes.

I guess I was just trying to figure out, as I model going forward, what was kind of the underlying run rate.

Again, those are more onetime operational start-up costs and I wouldn't model those on a go-forward basis, continuing on quarter-over-quarter.

It'll be a little bit more lumpy.

And as they occur, we'll be highlighting them for all of our investors.

Got it.

And then as it pertains to residential land, I was curious whether the builders are coming to you and asking for some higher density, smaller lots, or something that makes homes more affordable or are they just kind of still taking the same type of land as they've been in the last year or 2?

Yes.

Alex, as you know, you and I have spoken about this, but last year, really on the call I mentioned this, but last year we decided to create a high-density product in Summerlin that will allow for homes to be more affordable.

And if you look at the affordability statistics that you published, you'll know that you can see obviously that Houston and Las Vegas or Summerlin are below their peak.

And so at this time, builders are pretty satisfied with the type and mix of block that are on the ground and they're selling them in Summerlin and Houston at a pace.

So we haven't seen any change or request in that, but I wouldn't be surprised to see as that kind of affordability index increases, or gets towards the peak where that does occur.

And we'll be targeting that to make sure we create a much higher density product to protect our price per acre, and hopefully, our homebuilders will cooperate with that.

Got it, Grant.

And do you guys ever auction land for these guys on a rolling take-down basis or do you just kind of sell them 50 lots or 100 lots at a time kind of thing?

So in Houston, they're all on a rolling take-down basis so they take down 3 to 5 lots at a time and sell those.

So we do have forward contracts, if you will.

Got it.

And one last one on Hawaii.

Have you guys already made plans or announced plans of when the next tower is going to launch?

So Ka'ula, which is our next tower, was approved of by the HCDA earlier this year.

And we'll launch sales either in December or January for that tower, which is again on the park.

And we're really excited about that.

Both the interior and exterior of the building are beautiful.

And hopefully, we'll see similar success as we have seen in 'A'ali'i.

And ladies and gentlemen, this concludes our question-and-answer session.

I'd like to turn the conference back over to the management team for any final remarks.

It's David Weinreb.

Appreciate everyone joining us today and the questions.

And as always, we are available to answer any additional questions on our office number or mobiles, which many of you have.

Thank you, and look forward to speaking with you next quarter.

Thank you, sir.

Today's conference has now concluded, and we thank you all for attending today's presentation.

You may now disconnect your lines, and have a wonderful day.